Hapag-Lloyd Aktiengesellschaft (HLAG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Hapag-Lloyd Analyst and Investor Full Year 2021 Results Conference Call. Hapag-Lloyd is represented by Rolf Habben Jansen, CEO; Mark Frese, CFO; and Heiko Hoffmann, Head of Investor Relations. [Operator Instructions] I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.

Thank you very much, and thanks, everybody, for making the time to join us here today. Yes, maybe just as we get started, we're coming off, of course, of quite an extraordinary year. And if we look at the situation today, then we are again in a very extraordinary situation with, I think, all of us looking anxiously at the developments in Ukraine. And we like pretty much everybody else, I guess, is deeply concerned with this war in Ukraine. And as such, I think we've taken a fairly clear position on that. We stand with the international community. We uphold all the sanctions and would like to see a very quick de-escalation of this crisis so that we can hopefully prevent further human suffering and in line with, I think, what also our corporate values, what we try to do is try to do our utmost to ensure the safety and well-being of our colleagues. And we're leaving no stone and turn to do whatever we can to help them, and we try to do that especially for our colleagues in Odessa. So that is an introductory comment, and then I'd like to switch over to the reflection on 2021 and a bit of an outlook also into '22. Maybe a couple of opening remarks. If we look at last year, I think last year was characterized with strong demand for consumer goods and a lot of operational disruption. We've done a lot in order to try and take countermeasures, to alleviate the pressure on that. But I think it's fair to say that the entire industry has had a tough year in terms of service delivery. We have reviewed our strategy throughout the year as we are more or less halfway or a little bit beyond halfway in our 5-year plan. And based on that, we have decided to change a few things and are just caused a little bit here and there. In terms of numbers, because of the combination with very high demand and very tight capacity, which, of course, then results in a sharp rise in freight rates. We have seen extraordinary results for our EBITDA more or less quadrupled in 2021 compared to 2020. We also have seen, especially in the latter part of the year, transport expenses going up, and that's a trend that definitely continues also into 2022. We had strong cash generation, which means that our debt -- our net debt has gone down to pretty much 0. In terms of market, we have seen not only the demand, but we have also seen quite a lot of orders coming into the order book, and that should also help to reduce the pressure on the market, somewhere realistically from the second half of this year, but certainly also going into next year. When we look at '22, I think we believe that we will continue to see strong earnings momentum in the first half of the year. And then in the second half, we'll need to see, but as we believe that congestion will ease, we do think that we're going to go back to a somewhat more normal situation. A couple of words on what I said before, what are the key drivers of the result as we've seen it. Well, first of all, simply consumption of what consumers do. I still think that the graph on the left-hand side in the top shows it very clearly that if you look at the period before the pandemic and you look at where we are now, then you can see that there's a lot higher spend on goods and a lot less spend on services. So a lot of the growth in the stimulus that has been put out there by many governments has gone into that direction. And of course, then combining, then taking into account that there have been many COVID-related restrictions, we also see a significant effect of port congestion. And I think the graph on the left-hand side shows that also quite clearly, gives a little bit of a flavor of how much time ships spend in port. So the pandemic shift of consumer demand, we have seen a lot of disruption, service quality, even if it has certainly been better in the second half of the year. It's not satisfactory, particularly in the beginning of '21, and our operational costs have gone up, not only bunker, but certainly also on the charter side, we've seen a lot more storage expenses and also rail and inlet have gone up quite significantly. What have we tried to do? We've tried to do our utmost throughout '21 to alleviate operational challenges by on the one hand, investing but also by trying to refine and adjust sometimes a little bit the way we do things. We'll talk maybe first about where have we invested. We have bought about 300,000 TEUs of containers to make sure that we have enough boxes available to carry all the cargo. I do think that, that has worked quite well. I compare the situation in '21 with the bottlenecks that we had towards the end of '20, the situation has been materially more relaxed throughout '21, even if the terms are still very low because still today takes us because of all the congestion long before we get the boxes back. We have ordered new ships in total in the calendar year '21 for about 270,000 TEUs, which makes our overall order book around about 400,000 TEU. If we add in also the 23,000 that we ordered just before Christmas in '20. We hired about 1,000 extra people, especially in our customer service centers to take care of all the requests and demands that we get from our customers. Then we reviewed our strategy, have launched 5 additional quality promises, also launched a number of new products. On the one hand, we launched our -- what we call the quality freight product, which is basically guaranteed space on our ships for an extended period of time, week in, week out. That gives some certainty to our customers, but it also makes things more predictable for us in times where we typically have to do with very high no-show percentages. Then we put more emphasis on sustainability. We have done that on the one hand, by financing our investments in a greener way. We had the sustainability-linked bond. We had also the green financing of our ships. We published a new sustainability strategy. And of course, on the back of our financial results, we've also seen our credit rating improve. Then if we look at slightly more strategic, I think we've always said we would like to grow more in some of what we would call the attractive markets or markets where we think that in the long run, there is going to be above average growth. For us there, India and Africa are our 2 important markets. In 2021, as we also commented in previous earnings releases, we've completed the acquisition of NileDutch. That is meantime fully integrated, and we're very happy about the way that, that process has gone and that has certainly helped us to further strengthen our market position, especially in the Southwestern part of Africa. Earlier today, we also announced the planned acquisition of the Europe, South Africa Specialist Deutsche Afrika Linien, which we believe will really complement our service offering in the African market, in this case, mainly from Northern Europe to South Africa. Company founded in the late 19th century in Hamburg with main offices in Germany and South Africa. Carries close to 100,000 TEUs a year and has in itself a well-established network and works in a consortium with partners, Maersk and ONE. One highlight, I think for '21 is that we've started to offer customers multiyear contracts at fixed rates to give them certainty that they get the allocation and for us also that it helps us to improve efficiency. I think in times where there is so much uncertainty and where there is a lot of -- when capacity is tight, I think there is some merit in providing people some certainty on that front also for longer periods of time. I don't think there's many customers who would put all their volume into this type of product, but I think it can be quite a good baseload that I think and we have also seen a real good uptake on this project -- product, which we had targeted to become around 10% of our overall business. I think in the end, we are going to land with around about 11%, at least that's the way it looks right now. So with that, I basically end my introduction and would hand it over to Mark, who is going to talk us through the numbers. Mark, over to you.

Yes. Thank you, Rolf, and good afternoon to everyone also from my side. Looking at the next page, we really can see that 2021 was an absolute outstanding year for Hapag-Lloyd also and very much so from a financial standpoint. While the corona virus pandemic continued, and it put strain on supply chains and resulted in severe -- real severe operational challenges, the tight capacity situation led to an unprecedented increase in global spot rates, which in turn, has pushed our earnings as you can see, as a result, we were able to improve our profitability and strengthen our balance sheet. And in spite of strong demand, transport volumes were only slightly up due to the port congestions and a lot of operational problems and challenges. While the tight transport situation led to a sharp rise in freight rates, transport expenses on the contrary went up clearly as well. Nevertheless, EBITDA, as already said, quadrupled to USD 12.8 billion, leading to an EBITDA margin of around 49%. And due to the strong cash generation, net leverage was completely reduced in 2021. So jumping to the next chart a couple of KPIs with a closer look on our P&L. Here, we can see that the earnings trends accelerated even further in the fourth quarter. '21 revenue increased by over 80% to USD 26.4 billion, and EBIT jumped with that to USD 11.1 billion. And that led to that exceptional EBIT margin of 42%. Group profit in 2021 came in at more than USD 10.7 billion. Now having a look at the transport volumes, you can see that in spite of strong demand, transport volumes were only slightly up to 11.9 million TEU, mainly due to long waiting times at and outside of ports, particularly in North America and to some extent in Southeast Asia and Europe. As a result, transport volumes on the Transpacific trade decreased slightly, while the volume development on the Far East trades was more or less flat. And in order to meet the strong demand from container transport, we have deliberately redeployed vessels from the Intra-Asia trade to other trades to try to supply what is possible. In contrast, we have seen healthy growth in Latin America and Middle East, where these aforementioned port congestion problems were less of an issue. On the Africa trades, our acquisition and integration of NileDutch into the Hapag-Lloyd network last year resulted in a rise in transport volumes, and we are happy to welcome hopefully, soon the colleagues. Jumping now to a view on freight rates. While as I said, a higher volume growth was impeded by the continuing supply chain disruptions. Our average freight rates increased strongly due to high demand setting the tight capacity situation. At the same time, bunker prices continue to rise. And as we see, will further continue. The average bunker consumption price in Q4 2021 stood at USD 443 per tonne. With that, it's -- we have to say surpassed to the level we have seen in Q1 2021 when the introduction of the IMO low sulfur regulation kicked in and led at that time to a temporary surge of bunker prices. Now a look on Chart 12 on the cost side. The general upward trend observed in the last quarters continued due to the global supply chain disruptions as well as general cost inflation we have seen. As already pointed out on the previous slide, the rising bunker prices resulted in much higher bunker expenses. And in addition, longer dwell times at the ports and [ interland ] terminals led to rising storage costs for laden and empty containers. While depreciation and amortization was also up due to the rise in the percentage of ships chartered in on a medium-term basis at simultaneously higher charter rates and the resulting increase in right of use. And please remember that in 2020, impairment losses in the context of the ship portfolio optimization and the write-down of intangibles had a negative impact of roughly USD 14 per TEU on D&A. Adjusting for this effect, the increase of D&A expenses would have been much more pronounced. Having a look on our cash flow, we can see that due to the strong earnings development, operating cash flow increased to USD 12.3 billion. We have used the strong cash flow mainly to step up our investments in our vessel and container fleet. So in particular, we invested into the mentioned transaction NileDutch ordered additional container capacity to keep up with the demand and purchase second hand tonnage. And on top, made the first installment payments for the ultra large container vessels that we have or and Rolf talked about already. In spite of higher investments, free cash flow went up to USD 10.9 billion in 2021. So while we have paid down financial debt further and increased our dividend distribution in '21, the liquidity reserve increased to substantially numbers from USD 1.4 billion at the end of 2020 to USD 9.3 billion by the end of 2021. So what does all that mean for our balance sheet in the last 2 years, yes, for Hapag-Lloyd, but also for the whole industry, we all have enjoyed incredible success in terms of financial performance, thanks to that exceptional market environment. So we were able to strengthen our balance sheet very substantially. Here, let me say that it's fair to say and we have to admit that a return on invested capital of 70%, is wonderful as it might sound is not the new normal, and that freight rates will come back to more sustainable levels sooner or later. And maybe they should. Therefore, we will continue to stick to our prudent financial policy in future and execute on the strategy 2023, and Rolf will about that in more depth in a moment. Let me conclude with a view on our dividend proposal based on that strong result in 2021 and the very positive outlook for 2022, the Executive Board and the Supervisory Board proposed to the AGM, which we will have in May, a dividend payment of EUR35 per share. This represents a tenfold increase in comparison to the last year's dividend of EUR3.50 per share, but the payout ratio remains virtually unchanged. So we clearly stick to our dividend policy. And after a decade of lower dividends and after such a period, it's fair, there's such an increase now. That means the significantly higher dividend is a result of the earnings and not of any change in our dividend structure or dividend policy. And once again, we will, for sure, remain cautious and are willing to maintain our prudent financial policy by keeping the right balance between shareholder participation, additional investments and creditor interest. And having said that, I would like to hand over back to Rolf again for a market update and our way forward. Thank you.

Thank you, Mark. Going ahead and talk about markets, I think we can't come around talking a little bit about supply and demand when we talk about shipping. I think we've seen last year that the order book has come up significantly from a -- I would say, too low number, as we've commented also a couple of years ago already of a too low level of around 10% to now somewhat above 20%. I personally think that, that's good. Is it too high? One can always debate about that, whether there will be a little bit of overcapacity here or there. But also when we look at the idle fleet on the right-hand side, idle fleet as simply been too low over the last 2 years because basically everything that we could find has been sailing. And I do believe that in a global market or a global industry like ours, there should always be a little bit of slack in the system and also taking into account that scrapping has been incredibly low over the last year, so that will go up, and we will also have new environmental rules kicking in, which have an effect on effectively available capacity. I do think that the order book is at the moment probably roughly there where it needs to be. When we look at scheduled deliveries, most of that is coming in '23 and '24. Of course, a lot of it was ordered early last year, but it simply takes time before these ships are built and before they can be delivered. And as such, I think we'll see a bit of a peak in '23 and '24. On the right-hand side, you can see that scrapping is still very, very low. I always saying that keep in mind that the ship on average is in service for about 25 years. So the long-term average of scrapping should be around 4%. That's a number that we have not seen for a very long time, and that will come back somewhere within the next 3, 4, 5 years. Then when we look at the balance of supply demand, I do think that these are the official outlook. Of course, one can have a lot of comments on those. I would say though that, I mean, if you look at this on a slightly longer time horizon, then that seems to indicate that things are reasonably balanced. There is, however, of course, a lot of uncertainty in the market these days. And I would also say that the effective supply growth is probably going to be a little bit higher because when congestion eases, then of course, the real available capacity on a weekly basis will also go up. And I guess that with all the inflationary pressure that there is and with stimulus programs running out, there is certainly also a scenario thinkable in the upcoming couple of years, demand growth is less. Trying to take all of that into account and looking at where our business is today and also where rates are, we then came up with the outlook for 2022, where we do believe that transportation volume will go up slightly. That means a slow start to the year, also because congestion is pretty much at its highest peak that we've seen so far, but then gradually getting better in the course of the year. Bunker consumption price will increase clearly. I mean, we all look at the market today, I think bunker is around USD 1,000 per tonne. That would represent for us more than 2 billion additional costs compared to last year. We do think that the average freight rate is still going to go up even if in the course of the year, it will likely come down as markets start to normalize. But if you look at that and then ends up with an outlook that is not so far from where we landed in the end last year, probably with keeping into -- but then probably something to keep in mind is that whereas last year, we saw results improving further and further as we went -- as we came further into the year. This year, it will probably be the other way around, where we'll have strong earnings momentum on the back of the rates that we closed last year. And as the markets start to ease, one would also expect somewhat of a normalization in results also because there is tremendous pressure on cost. Bunker already mentioned, charter as well and certainly also on inland and rail. Then when we look at our strategy, we said we had another look at it. When we defined our strategy in 2018, we said we have 3 main goals. One is to be profitable throughout the cycle. Second one is to remain a global player with a market share, excluding inflation of around 10%. And number 3 is to continue to try to become #1 for quality. During our review, we've added one thing to it because even if we already did quite a lot in the area of sustainability, if we look ahead in the next -- into the next 5, 10, 20 years, we have to put that always on our agenda and very high. So that's why we've added that. When we look at the priorities for the upcoming couple of years that came out of this review, we've grouped them in 3 pillars. One is Simplify, which is all about making sure that we simplify our model if and where we can. That means simplify the network, try to optimize the fleet and where possible, deploy bigger ships to ensure that we keep costs under control and get unit cost down. Look at our hub and transshipment strategy and network and potentially consolidate transshipments in fewer hubs and also look at the depot network, which, in some cases, is very extensive, in other cases, it may actually have to be expanded a little bit. A number of things where we can do better if we want to truly become #1 for quality. We still need to do more on digitization and invest in innovation and to future-prove our IT. For us, that's the migration to a new operating system, but it's also simply being able to do things quicker and more agile. I think we made really good progress last year as evidenced also by new products that we've been able to launch, but I do believe that we can still do more. We need to continue to grow in attractive markets. That's why the acquisition of NileDutch and Deutsche Afrika Linien are certainly steps in the right direction. I don't think we have fully cracked the code on inland yet, we do quite a lot of inland business, but I do believe that, that still has a lot more potential. And as I said, we need to double down on sustainability and decarbonization. We will also invest, as Mark already alluded to, we have a strong balance sheet, and that means that if we have the right investments on the table, we will do them. On the one hand, we're looking -- we'll invest in people and capabilities because we believe that in order to retain and further develop the best people, we need to invest more in them than we have done so far. Of course, we'll continue to invest in chips and in containers and where possible and where useful, we will also look at external growth, but that's only if and when the right opportunity comes by. So that sums it up, I think, from our end, and then we'd be very happy to take any questions that you may have.

[Operator Instructions] First question comes from the line of Sathish Sivakumar from Citigroup.

I got 2 questions to start off with. So firstly, on your slide where you talked about multiyear contract volume, and you aim to have about 10% of the volumes on multiyear contract by '22. If you could actually give some more color, how does the pricing mechanism work for, say, year 2 onwards or maybe year 1, year 2 onwards. And when you say about mutual commitment, will you get actually compensated for not meeting minimum volume commitments in the year? Or would you just be followed up by an additional volume in the following year. So what does it mean by mutual commitment from a shipper perspective? And then the second question or actually related to the bunker. You did actually mention that you've included some bunker-related surcharges now. What percentage of your volumes are actually currently on bunker-related surcharges. I guess that your contract rates are negotiated ex-bunker, so those in would get reset. So we're just talking about these surcharges only for the spot volumes. And within that, what is the percentage? And then just remind us, actually, with regards to your scrubber, what percentage of your vessels are on scrubber. Again, just to understand how much your exposure would be for low sulfur versus high sulfur?

Okay. Maybe let me try and take them one by one. First question was on the multiyear contracts. In essence, these contracts are structured in such a way that the customer and we commit a certain volume on a weekly basis. And we agreed the rates for the upcoming 3 years between us and that is -- can either be a flat rate or it can be something that goes up or something that goes down, dependent on what you agree. It is a mutual commitment because it means that the shipper needs to make sure that we get the boxes and that they fill the slots because otherwise, it's guaranteed space. So then you also have to pay. And it's the same for us. If we don't provide the boxes or if we don't provide the slots, we also need to compensate the customer. So it's a 2-way street.

So sorry, just a follow-up there. So if a customer, say, this week, supposed to give you say 2,000 TEU worth of boxes. And if they don't turn up, so you still get paid for it?

Yes. Not in all cases, not -- I mean not always the full amount, but yes, there is a significant compensation payment, and it also works the other way around. If we have an agreement with you that we move 100 boxes for you, and we give you only 80, then we compensate you for the 20.

Okay. Got it. That's quite helpful.

Then the second question you had was on bunker and how much of that is covered through contracts? I mean pretty much all of our long-term contracts contain bunker clauses, which means that there will be an adjustment even if it will be with a time delay. And if you look at the long-term contracts, it's roughly half of our business.

Yes. And you actually -- sorry, go forward.

No, go ahead.

You said that you are -- in the presentation, you said you started to do some bunker-related surcharges. So if those surcharges are applicable only for this spot of your mix or?

I didn't say that. If I said that -- I really didn't say that, yes. We do not have any -- we have bunker clauses in our contracts, and those will be applied. I mean the spot market, this is spot market, which is typically just an all-in rate. And then your last question was on scrubber and what is roughly the share that we have, we are around 20%, I think, if I'm not mistaken.

Next question is from the line of Carolina Dores from Morgan Stanley.

I have 3, if I may. I wonder if you could comment on the conflict in Ukraine and any impact you believe you could have on seafarers where there is a large amount of your -- of the industry seafarers that either are from Russia or Ukraine? My second question is if you give us your view on the Biden administration allegedly offensive gathering investigation against ocean shipping industry, what do you think it come out of it? And my final question is, it's -- we were expecting some easing on congestion in the second -- in the first quarter of the year. It is now since you have pushed on the second half, how do you think the easing of the congestion plays out? Is this going to be just demand driven or there's actually some improvements in supply that could help untangle the congestion?

Okay. Well, I think maybe your first question was on how much is our business impacted from the Russian Ukrainian crisis. Well, it's a fairly small percentage of our overall business. I think in total, it's between 1% and 2% of our global business. So that is definitely manageable. So far because you also alluded to the seafarers. I mean we do not have a lot of Russian and Ukrainian crews. And so far, that seems to go as far as we are aware, at least within our own fleet. I think we in total have about 30 people across both nationalities. That is okay. Then you asked about the -- I think the Biden administration. But I guess more in general, I would say that when you look at the last 2 years, the situation in this industry has been very extraordinary. So I think it's very logical that there are a lot of regulators that ask questions about what is going on. I think that's perfectly justified, and I also think that they are just generally doing their job. That's not only in the United States but also in many other jurisdictions. And we just try to come up with the answers to those questions as good as swiftly as we can. And then your last point was on easing. Easing will not go from today to tomorrow. And of course, a crisis like we are now just facing in Ukraine really doesn't help. But I do think that we start seeing some first signals that things are easing a little bit. And there -- on the one hand, we see that the delays that we face in Asia have come down very significantly. And then we also see that COVID-related restrictions for people going to work are being -- are easing in many countries. And one of the root causes why productivity has been down and why capacity has been down is also because we've seen shortage of labor, especially in ports. And even if we still see many cases in many countries, I'm still cautiously optimistic that within a few months at the latest, we will see many more workers again available in those ports, and that will push up capacity, and that will also help. And to your point on demand, I also think we're going to see some effect on demand as well from higher energy prices and inflation as we see it today, whether that's a short-term effect or longer term effect that remains to be seen.

Next question is from the line of Sam Bland from JPMorgan.

I have 2 questions, please. I mean the first one, actually pretty similar to what you just answered, which is we're talking about normalization in the second half of the year. It kind of feels like we've been talking about normalization probably 18 months now. It probably related to what you answered, but are there kind of particular metrics you're looking at that tell you normalization in, let's say, 6 months is more likely now than it was 12 months ago? And the second question is on the transport expenses and the unit costs. We've seen those come up, particularly as last year went on. Are those sort of related to congestion and the high freight rates. So as congestion eases and freight rates come down, you'd also expect some of those transport expenses to come down. Obviously, the maybe the lease costs won't but probably the handling and haulage cost mine.

And to your questions, I think the first one on easing on normalization. I mean the metrics we look at are the type of metrics that we also discussed briefly in the presentation like congestion indices, but we look also very much about how quickly do we get the boxes back. Today, it still takes significantly longer than normal before we get the boxes back. That is something that hopefully starts coming down, but we see there at least at the peak that we that it doesn't go up any further. And if anything, I think we see some first signals and it's starting to come down a little bit. So it's those types of things that we look at. And in terms of unit costs, I mean, unit cost is definitely elevated. A portion of that, mainly the storage component when you look at terminals is probably a one-off. But in fairness, there's a lot of stuff that will also result in structurally higher cost because fuel is up. That has an effect on trucking, on railroads. We see that also in negotiations with terminals and other providers as capacity as cars, handling rates are also going up. We see feeder cost becoming more expensive. We see charters going up. So that's also where you have a little bit of a mismatch because in this market, you see first freight rates go up and then costs come only later and that's why, of course, you then see quite a big profit right now. But you shouldn't forget that for the upcoming couple of years, not only us, but all of the shipping lines have had to already accept a significantly higher cost base than we've had before, because of some of the factors that we just alluded to. And that's something that's not going to go away and when prices start to come down, okay, then we'll see that cost at least for a while are probably still going to go up or at least remain at an elevated level.

[Operator Instructions] Next question is from the line of Parash Jain from HSBC.

And I have probably one question for Rolf. Based on your recent discussion with your customers, particularly on Asia, Europe, are you saying that your customers are holding back from their orders or they are trying to delay any of the contract negotiation or any of the orders given the uncertainty arising out of Russia and Ukraine situation? And secondly, do you see some of the rail volume that were using Russia-Ukraine Belarus border would have a potential to move to the ocean and has a result kind of offset any negative impact?

I think -- I mean we've not seen a lot on Asia-Europe yet. I think post-Chinese year there's been a fairly robust recovery of demand. It's too early to say whether there will be any impact from the conflict. I think your point on rail is valid, the likelihood that at least some of that volume, if not most of that volume will be shifted back to ocean. I think that likelihood is high. And that could certainly give some short-term relief. Having said that, it's only a very small portion of the overall traffic that there is between Asia and Europe. So it's probably not going to make a tremendous -- it's probably not going to have a tremendous impact, and it also remains to be seen how long that situation stays the way it is today.

There are no further telephone questions at this time. I would turn it over to Heiko for written questions.

Thank you very much, Stuart. So we have indeed received also some questions written, so to say, because one of the analysts have not been able to dial in due to technical problems, which is actually Anders Karlson from Kepler Cheuvreux. I think we have covered most of his questions already, which was around the split of contract versus spot. Rolf commented on that also the multiyear contracts on how much we have there. Also signs of easing with regards to the global supply chain and so on, but there's one question that is still open from his end is around the outlook and he is asking what is meant by a moderate increase in rates for 2022, and I think I can take that one if okay. It's in the range of 5% to 10%, so mid to high single digit. That's it basically. And with that, I hand it back to Stuart, and I think we've got 2 additional questions coming in. Maybe, Stuart, you can take that up.

The next question is from the line of Dan Togo from Carnegie.

Dan Togo from Carnegie here. Two questions. One, relating your ambition to become #1 for quality. Do you have a view on where you stand today? Are you in top 3, top 5 and how do you expect to measure this? So what actually will you -- will decide whether you have reached, so to say, the top spot on quality? That's the first question. The second question is on return on invested capital. When these things here normalize, where do you see your return on invested capital will be -- would we go back to -- or are there some risks that we potentially go back to a period where this industry is value destroying for a number of years? Or do you expect it to be able to make value or create value for shareholders for a long period following?

Maybe let me try and take the first question first, which is around our ambition to be #1 on quality. I think how we measure that. Well, first of all, we measure that across the 10 quality promises that we have defined which are around responsiveness, accuracy of documents, invoicing accuracy, on-time delivery, all the things that one can think of. I do believe that, that's a good measure. Apart from that, we do a bi-annual survey of our customers, out of which we are measuring an NPS score. And we do believe that, that allows us to benchmark reasonably well within our -- not only within our industry but also with comparable industries. And to also underline our commitment to quality, we this year have also put in place a quality-related bonus to all of our employees around the world, which means that every 6 months, we will measure the improvements that have been achieved and dependent on how good or not so good they are, we will pay additional quality-related incentives to everyone in that particular area on top of regular salary. In terms of return on invested capital, I think Mark may want to say something about that, too. But of course, I'm not going to tell you that we are making a plan where we do not return our weighted average cost of capital. I think we've set ourselves out when we defined our strategy '18 to '23 to come up with a model where we always make money and over the cycle, at least earn back our weighted average cost of capital. I would say that also before the pandemic hit, we were actually on a very good track to get there. And I think that also without the pandemic, we would have been able to do that. Right now, and that's also why we did our strategy review last year. We're looking at what more can we or should we do to ensure that also in the midterm, we can still earn a decent return on the capital that we have deployed. I don't know, Mark, whether there's anything you want to add to that?

No, not really much to add to what you said Rolf, only maybe one comment that these times the '20 and '21, we for sure have used to optimize structures and invest intelligently that we are even more able to earn our cost of capital or even more than that over the cycle. So fully right, for sure, what you said, Rolf, even before the pandemic, and we used that time. So therefore, no plans out there, as you said, not earning cost of capital or even more.

Next question is from the line of Lars Heindorff from Nordea.

A couple of questions from my side. First, regarding the -- Rolf, I think you covered it a little bit earlier on the cost side that obviously the bunkers going up, but also on the time charter in that part of your fleet, which you actually lease. So I'm a little bit curious to -- if you can maybe give us an indication about the length or the average length of the CCN that you have, which I'm pretty sure must have gone up. That's the first part.

Yes. I mean I think when we look at the average duration of the time charter commitments we have today. I'm also looking at Heiko as I say it, but I think it's between 2.3 and 2.5 years.

Okay. Then the second one, again, maybe a follow-up on some of the earlier one about is the pace of normalization and exactly when it will happen. Some of the data that these track is from sea intelligence, which we can see that reliability for the industry in general is still hitting new lows. You mentioned that you -- one of the things that you track is how fast containers are coming back. But I'm just -- I mean we're hearing about slight improvement in congestion, various places and stuff like that. And then I'm just a little bit puzzled about the reliability, which appears still to be super path in the industry in general. If that sort of is one of the signs that you look at how you view that? Is that maybe a sign that it will take a bit longer than you expect?

It depends very much on how you measure these types of things. I mean if you look at the way Sea-Intel measures, I think they look at arrival within 1 day plus or minus compared to published schedules. If today, in many cases, we are 1 or 2 weeks of schedule with certain sailings that even if we get back to, say, 4 days within schedule -- from schedule, from 7 days from schedule, you will not see that in the schedule reliability. And when we look at the standard deviation or the average delay, for example, those types of things start to look a little bit better, which gives me some comfort that some things are moving in the right direction. In terms of real schedule reliability, which is in -- within plus or minus 1 day versus the original schedule, that is still going to take a while before it gets better. But if we own -- if we are starting to recover from 7 to 3 days, for example, that's, of course, a good step forward, and it's more that type of data that we also look at.

Okay. Okay. And then the last one is regarding the -- you mentioned the split between spot and contract volumes. But what I'm interested in is to get a sense for the -- maybe the design of those longer-term contracts if your customers are still seeking protection to the same extent as they've done previously? And hence, that the sort of key challenge here is just to first of all, secure space and then move the goods and then maybe look at the rate at a later point. And also, if you have those longer-term contracts, I mean, how many of those are sort of fixed and maybe if you had to do a fixed one for how long period are customers willing to fix the price?

I think when we look at the QPs that we talked about the multiyear contracts, I think that -- it's about 10% of our overall business. I think we've closed 11% of our overall business more or less. Most of them are for a 3-year period, so that's actually -- and as I said before on one of the previous questions, they contain significant compensation clauses for both parties in case they don't deliver. And I think what we see is that the customers that we close these contracts with, they tend to put only a portion of their volume on this type of product and then probably have other slices where they either play the spot market or make a normal contract. I mean it's a bit -- I always compare it a little bit with what you see in the airfreight business where you can have a block space agreement for a certain chunk of your business, then you can have an allotment where you have a certain level of space protection and then you can also go spot. And then if you mix the 3, that will also protect you quite well, normally against 2 strong fluctuations of the rate, and the risk that you added too far from market is not so significant. And as you see in our case, I mean, we lock in 10%, 11% of the volume on a long-term basis. That still means that a big chunk of it is not locked in on a long-term basis.

That was the last question for today. Please direct any further questions to the Investor Relations team. I would like to hand the conference call back to Rolf Habben Jansen for closing comments. Please go ahead.

Well, thanks, everybody, for making the time to listen to us today. I hope we were able to give you a bit of an overview of where we are and try to also give as good as possible answers to the questions that you posed. Thank you very much, and have a good rest of the day.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.